Many business owners who are selling a company for the first time do not know what to expect. Of course, every transaction is different and no one can truly predict what you will face. However, here are nine “surprises” that any first-time business seller may encounter:
1
Nothing Personal, It’s Not About You.
You and your business may nearly be alter egos and it may be nearly impossible for you to conceive a world in which your company survives without you. However, you will soon learn that the process of selling a business is not about you at all. Remember, we live in a free society, and indentured servitude is no longer a vibrant business model.
In reality, if you and the business are so intertwined that the business truly cannot survive without you, it will be hard to convince somebody to buy your company. Also, you need to understand that, during the sales process, the business (a/k/a your baby, your alternative self) will be questioned, criticized and belittled. Don’t let this get to you – it’s not personal and its not about you!
2
The Future Can Only Hurt You.
Most sellers want to talk endlessly about how well the business will do next year – “the future is so bright, you ought to be wearing shades!” Regrettably, buyers only want to talk about what happened last year and will tell you that the future is irrelevant. Secretly, the buyer may agree with your projections to some degree, but no wise buyer will admit it. The only time a buyer will show any interest in the future is when they believe that next year’s prospects look dim. If that happens, the buyer will want to talk about little else. Recognize the buyer’s perspective and how it impacts pricing, and be prepared to make the case for a high sales price using historical data. In the end, this all becomes an argument over price and is often solved by the use of an earn-out (part of the purchase price is tied to the future performance of the company).
3
Earn-out Ebb.
When buyers and sellers disagree over the value of a business, usually as a result of a differing view of the future, the concept of an earn-out appears. This can be a brilliant comprise between the optimism of the seller and the pessimism of the buyer which allows both sides to proceed in a state of bliss, each remaining convinced that their view will prevail and the price will be adjusted accordingly. The danger for you is that you adopt an overconfident view of the earn-out. An over-confident seller can unhappily discover that the earn-out should have never been considered “money in the bank.” It is critical to understand that an earn-out only provides you with partial control (at best) over the destiny of your earn-out. A paradox takes hold: You have to sell your company and give up control, yet maintain sufficient control over the business going forward to make sure you get your earn-out. Earn outs are often paid, but a conservative seller assumes that it will not be paid.
4
Due Diligence Drudgery.
How is it possible for the buyer to want to know this much about your business? Are they idiots? Can’t they figure out anything on their own? Every scrap of paper seems to become critically important. Even more worrisome, your buyer won’t commit to anything at all (pricing, terms, etc.) before your business has been studied under their microscope. You will be caught between trying to find that “last %^&$ amendment to that stupid contract” and worrying that the buyer is about to walk away with enough information to destroy you. Due diligence is a necessary evil (at least sellers view it as evil) in the process of selling a business, but it really needs to be viewed as a positive. Properly conducted and completed, due diligence means that there will be no surprises at the closing or after the closing and that things will work out as anticipated. As for somehow losing your business – it could happen, but that’s why you made the buyer sign a strong confidentiality agreement. (You
5
Somebody Actually Cares About The Meeting Minutes.
Remember those silly meeting minutes of those significant company actions that you were supposed to keep? No? Don’t worry, the lawyers for the buyer will remind you. For probably the first time in your life, you will actually be worried about whether you’ve kept up with all the legal formalities of operating a business. Quite obviously, if you have, there is nothing to worry about. But, if you haven’t – don’t panic, you are not the first entrepreneur in the history of the planet to have this problem. The good news is that a lot of these types of problems can be “fixed” in a way that provides comfort to the buyer. However, it is always much better to keep up with these responsibilities and make sure everything is in order before you start trying to sell.
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